When should SMEs start worrying about VAT?

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Knowing when to register or deregister for VAT is a question that hangs over many SMES.

If improperly timed, it can lead to excessive administrative tasks or missed relief if reclamation could have been possible.

As such, it is important for small businesses to understand how and when to engage with VAT.

What are the VAT thresholds?

Once a business has a taxable turnover greater than £90,000 in any 12-month rolling period, it is necessary for them to register for VAT.

When you notice that your taxable turnover is approaching the threshold, you will need to register at least 30 days before exceeding it.

If you do cross the threshold unexpectedly, you will have 30 days to register before you begin being penalised for neglecting your responsibility.

It is also possible for businesses that have a taxable turnover lower than £88,000 to deregister for VAT.

There are some instances where being registered or deregistered is more beneficial for a business.

Any business can voluntarily register for VAT at any time, but should know that it will be useful to incur the additional administrative responsibilities.

Companies that mostly engage in Business-to-Business (B2B) work may find it more helpful to be registered for VAT.

This is because VAT generally sits alongside the sale price of B2B transactions and can often be reclaimed in part by B2B businesses.

Companies that are chiefly focused on Business-to-Consumer (B2C) work are unlikely to benefit as much from early VAT registration.

As VAT is included in B2C sales prices, it is generally less likely that VAT can be reclaimed by companies that operate in this way.

Voluntary registration is often beneficial for B2B businesses, as VAT is typically recoverable by their clients. However, B2C businesses may find VAT registration less advantageous, as their customers cannot reclaim VAT, potentially increasing the cost of goods and services.

As such, B2C businesses that are operating just below the VAT threshold may benefit more from deregistering, as the ongoing obligations to deal with VAT could place a strain on their financial power.

What happens if VAT is mishandled?

As you may expect, HMRC do not appreciate errors with VAT reporting.

When deadlines are missed or information is not correctly reported, you will be faced with a penalty and the need to make corrections as soon as possible.

What are the late registration penalties for VAT?

The penalty is worked out as a percentage of the VAT due (output tax less input tax), from the date when you should have registered to the date when we either received your notification, or became fully aware that you were required to be registered. The rate of penalty depends on how late you were in registering:

There is a minimum penalty of £50.

What are the inaccuracy penalties for VAT?

The nature of the penalty reflects the honesty with which the error arose and mistakes are viewed with more sympathy than malicious attempts to shirk responsibility.

As such, honest mistakes will see a penalty of 30 per cent of the potential lost revenue placed on your account.

If you made a deliberate mistake but did not hide it, then the penalty will increase to 70 per cent of the potential lost revenue.

In cases where the error was deliberate and an attempt was made to hide it, the penalty becomes 100 per cent of the potential lost revenue.

HMRC may review your VAT submission if they feel that anything in it is not typical of the kind of business you run.

While oddities are not always a sign of fraud, you should be prepared to justify anything unusual in a VAT return if it was included for legitimate reasons.

How do I keep compliant with VAT filings?

If you want to approach VAT with confidence, it is best to seek professional support.

Our team can help you understand what VAT obligations await you and when, so that you can focus on managing your business.

If there is a question of registering or deregistering, we can help you make the choice that is right for your business.

Become confident with VAT filings by speaking to our team today.